India?s stock market regulator seems to be working overtime in the new year. Sebi?s new discussion paper on insider trading is a step towards acknowledging that such a problem exists, and that something must be done to curb this inequitous practice. Earlier regulations made it too difficult to establish conclusive guilt in cases of insider trading, which is the use of privileged information not in the public domain for an unfair stock trading advantage. There has always been a list of designated ?insiders?, including company executives and owners, who were supposed to adhere to a Sebi-devised model code of conduct which involved instructions on how to deal with external agencies like merchant bankers, lawyers, analysts and other consultants who are also privy to insider information. There were even ?deemed? insiders. But the adherence to the code was weak, since few people ever got caught. Yet, the malpractice has been rampant on Indian bourses, with some promoters even confessing in private that they consider this a matter of right as entrepreneurs. The new Sebi proposal will track cases based on a new set of guidelines, closing in on an insider involved in trades that accompany large price ?swings?, regardless of whether any information was used, the specifics of which are always hard to establish during investigations. While this may alarm those who see it as moving away from the innocent-until-proven-guilty principle, the proposed punishment is far from harsh. The implicated parties just need to surrender their trading gains to the company, so that all shareholders may benefit. This takes away the guilt associated with crime, and offers a solution to the problem of trading activity that?s unfair to ordinary shareholders.
From a pragmatic perspective, this may be workable. Even desirable. It is steeped in the reality that insider trading will happen so long as there are grey zones that make rules hard to enforce. Expect the discussions to centre around definitions of whether a 10% equity holding threshold is an appropriate qualifier for the insider tag. The issue of ?beneficial? owners and ?swings? will attract debate, too. But from a justice perspective, the regulation would amount to a compromise on principles. But then, the very idea of a pre-selected list of ?insiders? as prime suspects would appal jurists as well.
